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Virtualization: VMware vs Low-Cost Competitors

I guess putting VMware and pitting VMware against the typical low cost rivals may be unfair. Unfair since VMware has also indulged in “counter-disruptive” low cost strategy. They have so far responded adequately to counteract the moves of the “known competitors”. The knowledge of their products and its capabilities. Lets just take one competitor for instance , Microsoft’s Virtual Server ( software acquired from the firm connectrix). They knew by releasing the GSX server (in the form of Free Virtual Server) would stall and force such low cost competitors to freeze. A pretty good example of a “strategic entry deterrence”. As Wikipedia would describe it.

Strategic entry deterrence involves any action taken by an incumbent firm that seeks to discourage potential entrants from entering into and competing in the market, even if it is not profit maximising to do so in the short-run.

A good move, but a move that was based on the knowledge that VMware had. A move also that made them kill their GSX server. This pricing war started pretty bad. It not only put a dent in its own sales but also the low-cost rivals sales. Microsoft had to set its product free. Others are still hoping to somehow do some free download (single socket installation like that of Virtual Iron) and competitive pricing model for multiple socket installations.

OK so we have seen some of the moves that triggered these reactions from low cost vendors but what about the knowledge that you don’t have? What about the low cost vendor that may be charging up its cylinders to start developing products like mad? Take Parallels for instance, they have partly stolen the Mac community. XenSource on the other hand is going strong with its hypervisor and support for VT and Pacifica. So what you are seeing is the unpredictable behaviour and actions that the low end rivals are forced to take due to the ongoing battle and the counter-disruptive tactics that VMware may have employed. So how to move ahead and fend off the low cost rivals whose unpredictable behaviour is suddenly and gradually pulling the warm blanket of the “I know what you’re going to pull off, mate” feeling that you once hung up on?

But let’s just treat this article as a typical article where we pick the market leader in the Virtualization market and see how it should reinvent and reconfigure its strategies and milestones in order to stay ahead while staying abreast with all the tactics that low cost virtualization vendors are deploying to thwart its progress. Well whatever the case, VMware needs to back up a bit and refocus on the battle plan.

Re-Focus? But we are on track, aren’t we?

Sure we are but it just does not end here. In fact it starts here. What should you be doing? Join them and try to make money together? Kill? Or get into their low-cost game? What one should and cannot do is to underestimate these low-cost entrants and assume that they will go away like some bad toothache. No they won’t! In fact it could very well be possible that you , the giant of today, might have to completely let go of the market segment which took care of your flight to glory. Don’t forget the giants of today are the low-cost rivals of yesterday. Look at Google, Dell, Microsoft. They were all once little companies giving away stuff for a lot cheaper cost than their heavy duty competitors. What has become of those giants? And what will be the fate of the new heroes? We are moving into a rather “aggressive hyper-disruptive era”. 2007 has been touted as the year of hyper-disruption, open source glory, virtualization and server consolidation, desktop virtualization. But while you might look at the year 2007, you might also want to know that this trend will not end on 31st Dec 2007. It will continue and battles will get fiercer!

What actions to take then?

Here is what I would suggest:

1. Don’t go to (price) war unless really necessary

2. Keep expanding the client base from the core: Do I have my client A&R in place? : Client Acquisition & Retention is the “warm blanket”. Go out there in the cold alley (with Parallels and woo the Mac community), go for developers.

3. Intensify product differentiation : Bring in cooler product and make several choices for different market segments

4. Synergize low cost/no-cost spin off business unit with core business model: As an example keep the free VMware Server going stronger than ever, it has enough potential to generate explosive growth (especially in Asia, Africa etc)

5. Business Model Innovation: Become a solutions provider, Motto: “our cool state-of-the-art products come free, we just have a different subscription model”

6. Multi-pronged strategies must revolve around generating cash/value: Don’t go for disruptive practices purely to fend off the low-cost competitors, you will hurt real bad

7. Encourage catalytic innovations: These could be from outside your shop

8. Experience Marketing: We all need experiences. A great vacation spot is always printed into my memory, imagine if you could sell your experiences with your core clients to your potentials customers.

9. Intensify HR differentiation: Expand your team, get some die hard Bloggers, Dedicated players, Evangelists,Versatilists. Just as your products, you need some real good people to go to battle with you!

I will elaborate on these (not point by point here on my blog but as a PDF file downloadable later) in a few words later. But I think my point is pretty clear. Low cost rivals are here to stay. They will experience growth and should they do so, then they are certainly doing it at your expense. Yours because, if your current client base is not moving away then some day the low cost model will be attractive enough for them to move away. Some clients/customers you may never be able to get back but if you too have developed a low-cost model then there is a pretty good chance that you may help migrate your existing clients within the perimeters of your product/solutions offerings. These moves will help you gather some very interesting data to move on to the new and “not-ready-for-some-heavy duty-product” market segment, a typical SMB market thus.

Not every low-cost battle is worth winning and not every low-cost battle will be won but as long as you keep innovating on your business model, you will end up doing a lot better than your peers.


PS: When I'm done elaborating on the multi-point suggestions, I will make a downloadable copy as a PDF.

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